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More State Spending Won't Help Businesses, Taxpayers

June 8, 2007
Oped By PETER GIOIA

What it costs to do business within any location has a lot to do with most companies' prospects for success. This is particularly true in manufacturing, which is deeply embroiled in a high-stakes, low-cost global competition for customers.

Various national studies show that Connecticut is among the 10 costliest states in the U.S. for business expenses such as health care, energy and workers compensation.

How policy-makers deal with individual states' fiscal situations also affects the cost of doing business. Tax increases, for example, have an immediate impact on business costs. And when states increase their spending, even when current revenue streams seem to support those increases, tax hikes are inevitable when economic down cycles occur.

This year, Connecticut is expecting a significant state budget surplus based on a strong economy that's producing greater than expected revenue. While that's good, apparently, we are not alone.

According to the National Conference of State Legislatures, 42 states are expecting stronger than expected state revenues this year.

And data from the National Association of State Budget Officers shows that among Connecticut's closest neighbors:

Only New Hampshire plans a double-digit spending increase.

Only Maine and Pennsylvania plan tax increases.

New Jersey, New York, New Hampshire, Pennsylvania, Vermont and Rhode Island plan on some types of tax cuts or incentives, including efforts encouraging research and development or small business development.

In these eight neighboring states (including Massachusetts) budget increases average 5.39 percent.

Meanwhile, in the face of a growing state budget surplus in Connecticut - now projected at nearly $1 billion - policy-makers are negotiating a new two-year budget that could include significant increases in spending and possibly some tax increases. During the regular session of the General Assembly, in fact, the House and Senate approved a Democratic tax package that would have increased taxes by $740 million, but it was vetoed by the governor.

However the budget discussions are resolved, there appears to be a risky desire to establish a wider base of state spending, and for some, to stretch Connecticut's taxpayers even further, amid very favorable economic conditions.

This is not to say what other states are doing is right and what Connecticut is doing is wrong. What it does say is that most of our key local competitor states are not using their robust revenue streams to create a more volatile tax system. Most of them are also not making their states as vulnerable as Connecticut to an economic downturn by building up their spending base as much.

It's the long-term fiscal approach that counts and recently, no less of an authority than Alan Greenspan declared that the possibility of recession by end of 2007 is one in three. Midwest states are already experiencing localized recessions.

Connecticut's large spending and tax increase proposals, which are being advocated by some, could leave businesses and individual taxpayers - as well as the state's overall economy - in a precarious competitive position in relation to nearby states.

Peter Gioia is vice president and economist at the Connecticut Business and Industry Association.